Admittedly, it was a significant intellectual achievement to show that the weaker trading partner benefits from trade, even if the stronger partner is better at everything. But those fixed differences have largely disappeared in many markets. The question of what should be produced, and where, is now answered by dynamic processes of market signals and price movements, driven by human ingenuity and creativity. The cost savings resulting from successfully dividing labor and automating production processes dwarf the considerations that made comparative advantage a useful concept in economics.
Read the whole thing. In The Book of Arnold, I express a similar disappointment with Ricardian comparative advantage, because it is always taught as the “two by two” case, which hides the complexity of specialization in the real economy.
I had always assumed that comparative advantage was at least as much about chance and first-mover advantages as it was about climate and location (or even culture generally). So there’s no particular reason why a given industry should end up concentrated in particular region (computers in Silicon Valley, autos in Detroit) rather than other places that had similar advantages — no reason except happenstance. In the early days, hundreds of auto companies were founded and autos were manufactured all over the US. But Henry Ford built his company in SE Michigan.
So if motor city was an early analog to the Chinese scale clustering that is touted as a competitive advantage, cetera paribus, that may have certain implications.
You know, of course, that Paul Krugman’s Nobel Prize was for making the point you just made.
Hmmm. I understood Krugman was talking about economies of scale (as in manufacturing) rather than path dependence and network effects. Economies of scale could explain how we ended up with just the Big 3 auto companies, but can it explain the concentration of tech startup activity in Silicon Valley?
Perhaps a quick Wikipedia skim or a review of Krugman’s work would help.
https://www.princeton.edu/~pkrugman/scale_econ.pdf
https://en.wikipedia.org/wiki/New_trade_theory
http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/2008/krugman-lecture.html